Product Quality

Multiple Award ID/IQ Contracts: Perfected yet Unspecific

In the Article Current Problems with Multiple Award Indefinite Delivery/Indefinite Quantity Contracts: A Primer, I found most interesting is the manner by which the contract of sale is perfected. A contract of sale is defined as an “agreement whereby the seller transfers the property in goods to the buyer for a consideration called the price” (MacCluney v. Kelsey-Hayes Wheel Co., 87 F. Supp. 58), it normally involves a specific subject matter or good. In ID/IQ contracts, the subject of the sale is not specific as to the manner of delivery and quantity, it strikes me as odd since in order to perfect the contract, all that is needed is a minimum or maximum order amount. I believe that these types of contracts are open to dispute as to the quality of the good.

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The quality of the good in these types of contract are never mentioned, only the quantity. The quality, which is the most important aspect of the subject good, is left to future agreements between the parties. However, the problem arises when by virtue of a perfected ID/IQ contract, the supplier is bound to produce goods for the government and the supplier cannot back down from its obligation even if it is detrimental to its business. An example of this is when the government requires a certain good from the supplier, which is very costly to make or to import, the supplier cannot tell the government that since it would be detrimental to its business, it cannot get that particular good for the government. If the supplier argues it that way, then he shall be liable for breach under the perfected contract. This is only one of the problems that may arise from a perfected contract where the quality of the good is not particularly specified.

False Statement Statute: A Good Defense Against Misrepresentation yet is Easily Manipulated

Misrepresentations in the commercial world abound, sellers are willing to make false representations or convenient omissions just to make a sale. In these commercial transactions, the buyers are being induced to buy the good not because of the true quality of the good but because of its alleged “superior attribute.” Sellers normally do not choose who they defraud, even the government is sometimes subject to this type of tactic especially on their contracts.

In the Article Business Ethics in Government Contracting by Claude B. Goddard, Jr., he mentioned a statute which is being used by the Government in order to protect itself from this type of fraud. The False Statement Statute, which makes it illegal for sellers to make “false representations”, is one of the government’s aces to prosecute sellers with golden tongues but with brass goods.

By invoking the False Statement Statute, the government is able to hold sellers liable for all their representations as to the quality of the goods that they sell to the government, however, this will not completely eliminate disputes regarding product quality. According to the statute, only statements that were made by sellers which they willfully gave despite the fact that they knew it to be false are punishable. In such cases, the seller may claim that he did not know that what he uttered was false and this defense may stand in court. In the end, the courts are still given the burden of examining whether the statement was willingly given and was known as false.

Dealing with Disputes on Product Quantity or Quality Arising from Different Warranties.

Implied Warranty of Mechantability

In all cases of sale, except if expressly stated that there is none or is modified, there is an implied warranty that subject goods are merchantable (UCC § 2). This warranty attaches if the seller is a merchant with respect to the goods of that kind (Williston on Contracts, 1979).

Despite the clear intention of the law that there must be an implied warranty, it is still a source of discussion and dispute. The primary problem with the implied warranty of merchantability is on whether the subject good can be considered “merchantable.” The courts in addressing this problem, has enumerated several elements that may guide a party on determining whether the good is merchantable or not.

For a good to be merchantable, it must be at least such as (a) pass without objection in the trade under the contract description; (b) in case of fungible goods, are of fair average quality within the description; (c) are fit for the ordinary purposes for which such goods are used; (d) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; (e) are adequately contained, packaged, and labeled as the agreement may require; and (f) conform to the promises or affirmations of fact made on the container or label if any (Williston on Contracts, 1979).

Express Warranties

Express warranty has been defined as “an affirmation of the quality or condition of the thing sold, (not uttered as matter of opinion or belief,) made by the seller at the time of the sale, for the puspose of assuring the buyer of the truth of the facts affirmed, and inducing him to make the purchase, if so received and relied on by the purchaser” (Distillers Distributing Corp. v. Sherwood Distilling Co. 180 F2d 800). A common dispute arising from express warranties is whether the declaration made by the seller is an affirmation of fact or a statement of opinion.

This is a source of misunderstanding because of the fine line that differentiates an opinion from a statement of fact especially if the seller is pretty convincing. Also, in other jurisdictions, there is a term called “dolus bonus” which are the normal exaggerations of merchants to induce buyers (Sefton-Green,) which sometimes is also a source of dispute. When these exaggerations are so subtle that they may pass off as true, they tend to cause confusion and sometimes court action.

In addressing these issues, the courts are now moving towards making the sellers liable for their statements even when these statements are sometimes considered “puffing” (Hansen Firestone Tire & Rubber Co. 276 Fd 254). Representations expressed and disseminated in the mass communications media and on labels that are proven to be false and a resulting damage to the buyer is caused, then the sellers generally cannot escape liability (Randy Knitwear, Inc. v American Cyanamid Co. 11 NY2d 5).

Warranty Against Infringement

The law provides that a there is, in all sales, an implied warranty against infringement. The doctrine states that the seller warrants that the goods he is selling is free from any third-party claim, to wit:

Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications. (UCC § 2 – 312 par. 3).

Disputes regarding warranties against infringement commonly arise when because of the buyer’s negligence, he is unable to ascertain, through careful examination, the status of the goods. This is common when the good bought was fenced.

Letters of Credit: Their Importance and Inner Workings

It is now commonplace to transact business using documents rather than money, one of the most used commercial documents is the letter of credit. A letter of credit is an “instrument issued by a bank on behalf of its customers, the buyer, authorizing a seller of merchandise to draw drafts on the issuing bank (or one of its correspondents) for the issuer’s account, provided the seller complies with the conditions agreed upon by the buyer and the issuing bank” (Rabkin, 1978). In this type of transaction, the bank uses its reputation in place of its customer since the latter is less-likely to be well-known, to guaranty the fulfillment of a transaction (Rabkin, 1978)

Basically, a promise by a reliable third party (the bank) to pay the seller if the latter performs its obligations to a buyer, is what a letter of credit purports to be (Rabkin, 1978). This promise is enforceable by the seller against the bank even if he is not privy to the bank and buyer’s agreement.

After the transaction, the buyer shall then reimburse the issuing bank based on the manner they have agreed upon. The buyer may either deposit funds in the issuing bank or he might already have funds with the bank and the price shall be deducted from his account with the bank. The buyer, however, shall only reimburse the issuing bank after the seller has complied with all the terms of the agreement between the seller and the buyer. If the issuing bank pays the seller, regardless of whether the seller has complied with all the terms of its agreement with the buyer, the buyer shall not be liable to reimburse the bank since reimbursement is preconditioned on the faithful compliance of the seller of all the terms of the agreement.

Delivery Term: Free On Board

Free on Board (FOB) is a delivery term used in shipping goods. Free on Board in modern times may either be Free on Board Shipping Point or Free on Board Destination (Ivey). There is a huge difference between the two terms since the liabilities of both buyer and seller are determined by the term used. FOB Shipping Point means that the Buyer pays the freight for the goods, consequently, he also assumes liability for the good while it is in transit. All loss that may occur to the goods, fortuitous causes notwithstanding, shall be for the sole account of the buyer. The seller assumes no liability until he acquires possession of the property or it has been delivered to his warehouse.

On the other hand, FOB Destination means that the Supplier pays the freight of the goods, which consequently imputes on him all liability for any loss suffered by the goods while it is on transit (GSA.gov). The reason for the liability of the seller in FOB Destination and the buyer in FOB Shipping Point is based on ownership. In these two cases, the ownership of the goods is transferred from one party to the other on the point indicated in the FOB, thus FOB Shipping Point means that the ownership from the buyer to the seller is transferred on in the point where the goods are shipped, whereas, FOB Destination, means that the ownership of the goods is retained by the supplier until the goods arrive at the port of destination agreed upon.